Competition for investments between States and voters rewarding good governance will help drive reforms, said Arvind Subramanian, Chief Economic Adviser.

This was among the critical issues that formed the backdrop for the Fourteenth Finance Commission’s recent recommendations on increased devolution of funds to States which the Centre had accepted.

Apart from the reforms driven by the Centre, the “dynamism of competition between States” is expected to drive change. A good model of State Government can attract capital, labour and technology and inspire others to emulate, he said at a presentation on the Economic Survey of India for 2014-15 at the Madras School of Economics.

He said the Centre has demonstrated its commitment to “cooperative and competitive federalism” by increasing devolution of funds to States to 42 per cent of tax revenue from 32 per cent previously apart from non-Plan Grants.

Though some States are miffed that the net increase has not been significant because Plan Transfers have dropped, Subramanian said State Governments have greater say over the expenditure.

Enhanced devolution has obviously paid off as a study of budgets presented by 17 state governments taken along with the union Budget has indicated that fiscal deficit and revenue deficit are being controlled and capital expenditure going up, he said at the event organised jointly with the Southern India Chamber of Commerce and Industry.

The Budget this year has also balanced fiscal discipline with greater public investments in infrastructure as it has recognised that private sector is handicapped by the sluggish business environment and public-private partnership model has to be reworked.

Data indicate that one in three private firms do not have even the ability to service its debt. This has also put the banks under pressure. Public investments will act as a catalyst to attract private investments, he said.

comment COMMENT NOW